The Most Important Chart Right Now For Equities

It’s always nice to see the equity markets make a new all-time high. Journalist are happy because it draws more views, traders rejoice in the rise in their portfolios, and consumers get a warm feeling as they associate the stock market with the economy. However, when I see we have a new high one of the first things I do is look for confirmation. We can’t forget that the stock market is truly a market of individual stocks. How many of those stocks also made new highs? How many were advancing? Was momentum strong? What about volume? Which sectors helped lead things higher? These are the questions I ask.

I discussed many of these topics in my Technical Market Outlook on Monday as well as my post from a few weeks ago, We Haven’t Seen a Market Top Yet. However, there is currently one chart that I think is extremely important, and could ‘unlock’ the bear market that many traders have been pining for and that the market internals have been attempting to warn us of.

Below is simple chart of the S&P 500 ($SPX) over the last six months. I’ve put a green box around the prior high, including the closing and intraday levels. The markets inability to stay above this high is very concerning to me, and could be creating a false break. If the bulls are unable to keep the S&P above the prior high, the idea that stocks will rally into year-end may not come to fruition.

SPX

There are many similarities to the current market environment compared to 2007. We have breadth, as measured by the Advance-Decline Line putting in a series of lower highs as fewer stocks participate in the rally. Momentum, as measured by the Relative Strength Index, on a weekly chart has also created a bearish divergence with a grouping of lower highs. Like in July 2007, the S&P dropped down to its 50-week Moving Average before rallying to a new high. Unfortunately, as in October 2007, the bulls couldn’t maintain control and price fell lower – eventually breaking through the prior support of the long-term Moving Average.

I didn’t think the September high was the peak for the year, we hadn’t seen enough damage done to the internals (breadth and momentum) yet. But at this point, we may now have. I’m now watching to see if the psychologically important 2000 level holds for the S&P 500. It seems like traders, both professional and retail like round numbers as their levels to watch (don’t ask me why). A break and follow-through past 2000 may just be what the bears need to carry things lower.

While I prefer to be positive and bullish, the way the market is acting right now, it’s hard to make that argument. There just seems to be too high of a level of positive sentiment with traders pointing to strong seasonality, mid-term elections, and Japanese stimulus as reasons to ignore the deteriorating market internals. I hope we see price hold above 2000 and is able to regain the September high, but if it doesn’t then things may get ugly. We’ll see what happens.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 11/3/2014

The S&P 500 closed out last week up 1.17% while small caps ($IWM) fared better, up 4.94%. and International stocks ($EFA) had a good week as they bounced 2.76%. With the strong recovery back to new highs seven of the nine S&P sectors are back above their respective 50-day Moving Averages. Materials and Energy remain the laggards, still trading below their intermediate MA.

Trend

As the V-shaped recovery pushed the S&P 500 to a new high, we now have the ingredients for a new positive trend in stocks. I had been watching the prior trend line off the past series of higher lows (dotted green line) and whether it would act as resistance on the bounce, it did now as stocks powered higher. Price is now firmly back above the 100-day Moving Average and 20-day MA.

trend

Breadth

When the market makes a new high, what do you not want to see? Breadth not confirming the high by still being under its own previous peak. As measured by the Common Stock Only Advance-Decline Line and the Percentage of Stocks Above Their 200-day Moving Average, breadth is continuing to diverge from price.

One positive note to make about breadth, is that the S&P 500 A-D Line (not shown) has confirmed the new high in stocks. So which is more important, the NYSE Common Stock Only or the S&P Advance-Decline Line? The price action over the next couple weeks will likely let us know.

breadthNew 52-Week Highs

While the Breadth chart above shows a bearish divergence and a lack of confirmation, how many stocks in the NYSE did in fact try to confirm the new high in the major index? A pretty large amount, 521 to be exact. This is the most issues on the NYSE to hit a new 52-week high since May 2013 and before that it was 2010. During the bull market off the ’09 low, when we’ve seen this many stocks hit a new high we’ve seen the S&P pull back on a short-term basis.

While a lot of traders have been comparing this market to the peak in 2007, myself included in the post from October 15th, We Haven’t Seen a Market Top Yet. However, this spike in new highs puts another arrow in the quiver for the bulls, as this set of data created a large divergence back in ’07, not showing the strength we saw on Friday.

new 52wk highs

Momentum

The downtrend in the Relative Strength Index (RSI) is nearly over with the momentum indicator testing the prior high around 68 and has broken above its falling trend line.  The Weekly RSI is still showing a series of lower highs, as last week’s rally did not push hard enough in getting momentum higher. The Money Flow Index is now ‘overbought’ and may be signaling for a short-term decline in stocks.

momentumBond Market

If you believe that bond market is ‘smarter’ than the equity market, this next chart has likely kept you out of stocks for the bulk of 2014. Traders have continued to show a preference for long-dated Treasury bonds over High Grade debt, pushing the ratio between the two into a down trend. The same can be said for the 10-Year Treasury Yield.

There use to be a time where bonds would confirm the moves made in stocks and this would make traders feel nice and cozy inside, but that time has passed. Either the correlation between stocks and bonds is changing or traders no longer feel High Grade bonds deserve to be price like stocks.

Bonds

60-Minute S&P 500

It’s hard to not appreciate the level of aggressive traders had during the recovery off the October low in the S&P 500 ($SPX). Gap ups have gone unfilled and momentum has remained elevated for the majority of the advance. We now have a level of support in the Relative Strength Index by connecting the lows. A break of this support zone will likely act as a ‘tell’ for an intraday decline. While there is a slight divergence in the MACD, the strength in the RSI in my opinion outweighs it. When these two momentum indicators tell different stories, I often find myself relying more heavily on the RSI, but that’s just me.

60 minSector Relative Strength

We’ve seen quite a bit of improvement on the Relative Rotation Graph. Five of the nine S&P sectors are now in the ‘leading’ category, although Consumer Discretionary ($XLY) is close to falling into the ‘Weakening’ category as its trend  and trend strength both appear to be losing steam. Materials ($XLB) and Energy ($XLE) continue their trek deeper into the ‘Lagging’ category, unable to get a good footing to improve relative the S&P 500.

RRG sector

International Relative Strength

Traders have continued to show preference for U.S. equities over their international brethren. It’s been five weeks since we last saw a foreign market in the ‘Leading’ category. While a handful of countries are strengthening  in the momentum of their relative trend, only one, the Netherlands ($EWN) has been able to break into the ‘improving’ category.

Intl rrg

Sector Performance Off the Low

Understanding sector leadership off a low can help us better understand of the strength the move in stocks had. The best performing sector off the October 15th low was Health Care ($XLV) followed by Industrials ($XLI). Consumer Staples ($XLP) which held up well during the down turn, being the second best sector, was not shown a positive bias on the march back to new highs.

sector off low

Sector Performance Year-to-Date

Not much as changed for sector leadership for 2014, with Utilities ($XLU), Health Care, and Technology ($XLK) still holding the top three spots. Energy ($XLE), Consumer Discretionary, and Materials have been the worst performing sectors YTD.

sector performance ytd

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are Corn Prices Poised To Rise?

While the sexy market as of late has been equities, certain commodities have begun to shape up nicely as well. I’ve been fairly vocal about commodities this year. My favorite market coming into 2014 were agricultural commodities, then a momentum divergence put an end to their rise, and in early August I began looking at Cotton ($BAL). Right now the Corn ($CORN) market has caught my attention as it enters a bullish period of seasonality, extremely low sentiment, and has potentially started a new up trend.

Price Action
First up lets look at the latest price action for Corn ($ZC_F). After the April peak, the price of corn has been in a well established down trend as we saw a 36% drop down to the October low. However, as October trading got started traders pushed corn prices above the falling trend line and we now have the beginning of a potential new up trend.

Corn price

Seasonality
Commodities often see strong headwinds and tailwinds created by seasonality. The chart below is from Signal Financial Group and shows the 10-year average seasonal pattern for corn prices. It’s not hard to notice that a low is put in at the start of October. This also happens to be what we have started to see this year, with corn prices rising since the calendar closed the door on September.

Corn seasonality

Sentiment

We know that price may be starting a new up trend and it’s happening at the beginning of the bullish seasonal period for the commodity, but what’s the general sentiment towards the crop?

The following chart is from SentimenTrader and is a proprietary index that compiles sentiment data from multiple sources for different asset classes and markets. With a current reading of 32, sentiment is near Excessive Pessimism, which has led to higher prices over the last six years when this has occurred – albeit it’s only happened twice. It appears no one likes corn anymore, which makes it an interesting market to watch.

Corn sentiment

While there are plenty of stories right now about the bumper crop that farms across the country are having, we may still see the price of corn rise going into year-end. You don’t have to be a farmer or know how to drive a tractor to follow the agricultural commodity markets. If we continue to see corn prices rise, establishing a more defined up trend, then I’ll expect sentiment to improve as well as more traders, specifically trend followers, begin to take notice.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.